On March 4th 2016, the Basel Committee on Banking Supervision (BCBS) specified the proposed alternations to the operational risk capital framework, also known as the new Standardised Approach (SMA). The SMA is part of BCBS’s consultation paper which has been issued in October 2014.
The suggested alternations of the operational risk capital framework are aimed at achieving BCBS’ broad objectives of balancing simplicity, comparability and risk sensitivity. The changes are necessary to make a step towards completing the post-crisis reforms of the current year. The objectives of the proposals are necessary, but they will have a neutral impact on overall capital requirements of most banks.
BCBS recommends simplifying the regulatory framework by replacing three existing standardised approaches for calculating operational risk capital, as well as the Advanced Measurement Approach (AMA). Besides the regulatory framework, the risk-sensitive framework that combines financial statement-based measures of operational risk with an individual firms’ past operation losses have to be strengthened. Finally, the AMA needs to be discharged. Removing this framework will lead to a less complex modelling of the operational risk for regulatory capital purposes and less variable in risk weighted assets and insufficient levels of capital.